Next Multi-billion Dollar Idea─ Part II

3/23/2017
Anant Goel & Alan Kyle Goel

Real billion dollar ideas have multi-billion dollar market size, they are scalable, and they leverage drivers of growth to go viral or global.

In Part I, we introduced a 20 year old high-tech company at the cusp of hyper growth in sales revenue and profitability that has its share price double over the last 2 weeks. In the last year or so, all of the enabling technologies have come together to make mass production possible to meet global demand at reasonable cost.

Market: In addition to interactive PicoP projection and heads-up display (HUD) markets, MicroVision is targeting four noteworthy tech arrivals of the last few years that are gaining momentum, and are expected to experience extremely rapid growth in the next few years.

Entered into several strategic agreements in new markets beyond the three MicroVision engine products.oOne: development contract with a top-tier technology company for the 3D sensing ADAS application [Advanced Driver Assistance Systems].

oSecond: development contract with another top-tier technology company for an Augmented and Virtual Reality application.

Finally in November 2016, we signed a strategic co-marketing agreement with ST Micro to create and proliferate [MicroVision and ST Micro] LBS solutions globally.

oBroad range of products that include interactive pico projection, augmented and virtual reality, head up displays and 3D sensing.

oMicroVision had demo systems in ST’s customer suites at the CES in Las Vegas [January 2017]

oMicroVision had demo systems in ST’s booth at Mobile World Congress in Barcelona [March 2017]

Stephen Holt - CFO

2016 Financial Results:

Revenue:

2016 revenue of 14.8 million was a 61% increase over 2015. [12.8 million product revenue, 1.8 million of royalty revenue and 100,000 of contract revenue]

Q4 revenue was 2.9 million [2.5 million of product revenue, 321,000 of royalty revenue and 37,000 of contract revenue]. The 2.9 million of Q4 revenue is lower than the 3.6 million we had in Q3.

During Q4, we shipped the last of the Sony orders that we’d received in 2015 [March 2015].

Margins:

We greatly reduced the cost of producing MEMS and saw margins increased to 30%... eight points better than in 2015.

oGross margin for the quarter was 17% and is lower than Q3's margins due to lower volumes.

oIn 2016, we strengthened our operations team under experienced leadership and are very pleased with their achievement during the year.

Throughout 2016, we experienced steady improvement in manufacturing yields and reductions in variable costs. Even in the Q4 when production volumes were significantly lower, yields remained high and per unit variable costs were the lowest of the year.

We believe the operations team and their experience will be the significant asset as we launch our engine business this year [in 2017].

Expenses:

In 2016, expenses were $20.8 million compared to $16.6 million in 2015. Increase in expense was driven by ASIC design work, salary and benefit cost and added headcount.

In 2016, headcount increased by 13 people. [7 in operations, 3 in engineering and one each in IT, sales and accounting]

Q4 operating expenses were $5.8 million compared to $5.3 million in Q3 and $4.7 in Q4 of last year. The increase is mostly due to an increase in spending on ASIC design work, increases in salary and benefits costs and increased headcount.

Profit/Loss:

For 2016, the net loss was $16.5 million [or $0.32 per share] compared to net loss from 2015 was $14.5 million [or $0.31 per share].

Q4 net loss was $5.4 million [or $0.09 per share] compared to net loss from Q4, 2015 net was $4.3 million [or $0.09 per share].

Q4 cash used in operations was $4 million, Q3 cash used was $3.8 million and in Q4, 2015 cash used was $3.7 million.

Cash used in operations for 2016 was $14.8 million; cash used in 2015 was $5.8 million which reflects the $8 million license fee we received that year.

Cash & Cash Equivalent on Hand December 2016:

On December 31, it was $15 million and reflects the proceeds of what we raised from the two financing transactions we announced in the quarter.

Backlog:

We had backlog of $942,000 at December 31

This entire backlog is related to Augmented Reality and Automated Driver Assistance System's contracts we announced last November.

As Alex will discuss, we are working on building product backlog with orders for MicroVision new engines.

We will now go back to Alex for discussion of 2017.

Alex Tokman

Our 2017 Objectives:

First: Significantly grow revenue for the third consecutive year.

oAt this time, we announced plans to begin selling our new LBS engine starting second quarter of this year. We anticipate the revenue from this line of business to be in the range up $30 million $60 million in the 12 to 18 months following the mass production shipment of the first engine.

oWe expect that 2017 revenue from these new products to be weighted towards the second half of the year.

oThis revenue does not include other sources, development contracts and others.

oWe began shipping samples of the first engine in December.

oWe successfully showcase three new engines demonstrators at CES 2017.

oWe’re on schedule to mass production ready with the first engine in the second quarter of 2017. We have begun development with customers for the new engine opportunities and we’re expecting orders for the first engine in the near future.

oFirst, we delivered the Augmented Reality proof-of-concept demonstrator under the Phase I agreement to one of the top-tier technology company and we have signed since then Phase II for on-contract with them, which is expected to be complete this year. It’s about $900,000 and it’s not included in the 2016 backlog that Steve just mentioned. Our technology offers inherent display and optical advantages for augmented and virtual reality applications. Images are scanned directly and safely into the user's eye creating a large field-of-view, high definition, virtual, see-through images with the small form factor lower power consumption and very low lag and persistence.

oSecond, we are on track to deliver [this year] a proof-of-concept demonstrator to another top-tier technology company for ADAS and 3D scanning application. MicroVision PicoP scanning technology’s ability to create a slim, power efficient, scanning engine that can capture 3D data, while projecting HD information simultaneously is one of the main reasons we believe, we will be competitive in this segment. The other one is that we offer extremely low persistence in lag performances, which are important for example, for autonomous vehicles, because they require a superfast and accurate response to their environment.

oThe combined value of these three contracts is approximately $1.8 million, but the real revenue opportunity lies in the potential to be designed into the future products in two markets that have the opportunity for very high growth. If we deliver both of these initial phases, are successful, and these companies choose to pursue these products, these relationships could result in additional material agreements that could lead to more near term revenue and to our technology being in these customers' products.

Question-and-Answer Session

Q: Nick Altamann [for Mike Latimore of Northland Capital]

On the topic of 2017, what are gross margins going to look like this year. And how much revenue from Sony are you guys expecting this year?

A: Alex Tokman

On the margin question, we expect that the engine business is going to have margins in the 20% to 25% range once we start ramping up production.

A: Stephen Holt

Regarding Sony, we have fulfilled all open component orders there is to Sony in systems to date. We believe we have shipped more components than they have sold engines at this point in time. We expect to continue to receive royalty from Sony and the deferred revenue from the license fee. We are on standby and able to support them at any time they need us and they need additional components.

Q: Nick Altamann

What is revenue breakeven for the year?

A: Alex Tokman

Well, breakeven is obviously going to be a function of what the product mix and the margin is, as well as, what the OpEx is at that point in time. So it's a little premature for us to be specific on that, and also that we're just launching the engine business and the royalties and margins on that need to develop in 2017.

Q: Unidentified Analyst [Glenn from Landenberg Thuman]

On the Q3 call you mentioned product revenue in Q1 [2017] as being possibly a few hundred thousand dollars or something. Is that still the thought process or it just kind of the cadence of revenue growth throughout the year?

A: Alex Tokman

What we said it could be couple of hundred thousand, or could be higher. We're sticking with the same guidance, we will update on this in a couple of months.

Q: Unidentified Analyst

Could you talk about your confidence? And if there is a significant ramp in order to get revenue growth in 2017. So you must have some confidence on some near-term orders, maybe a little color on what gives you such confidence and maybe, if you feel comfortable talking about, just exactly what kind of end products you see as being relevant early on?

A: Alex Tokman

The new line-up of engines we announced in November and targeted at wide variety of OEMs and ODMs customers for multiple applications. We heard over the past 18 months, when we were helping Sony to bring on customers for their engine, we heard people asking for certain features that we’re not available at the time, which gave us an initial start to developing features that we thought, were valuable for multiple customers.

As a result, we felt we were ready to announce to the world that we’re going to introduce three new engines and we started shipping the samples of the first engine in December. So we are right now about two months into this process. So in January and February, our samples were in the hands of customers, and they’re going through their normal evaluation processes. The initial feedback makes us believe that we’re going to increase backlog this year and we’re going to hit our significant revenue growth target for the year.

Q: Unidentified Analyst

Congratulations on moving into the Second Phase of this proof-of-concept, which is, I believe for the Augmented Reality trial. And so, can you talk a little bit more about how long of processes is that, how many more Phases is there. If you’ve hit your marks in this Phase, what’s the next step going forward?

Alex Tokman

Depending on the customer it differs. Sometimes you have to go through several phases before they design you into a product. Sometimes you go up for one phase it differs, so we can't comment on specifics. But what we can tell you is that, because we believe, let's start with augmented reality:

We provided our deliverables in early this year.

We immediately received the feedback and they liked what they’ve seen.

We immediately signed a full on phase. So we personally believe that augmented reality and the autonomous vehicles will be not only hard market, but also important growth segments for us. And we believe that what we started last year is going to move us closure to our goal basically to be designed in one of these products in the future.

Q: Unidentified Analyst

Thanks for the color and congrats on results.

Q: Henry James [State of Michigan]

Late in the year last year, you had talked about a major regional player that was going to be a potential customer of Sony. What is the status of that?

A: Alex Tokman

We introduced that specific player to Sony. We’ve done all the necessary work to get them up and ready to negotiate with Sony. Our contributions have diminished because now it’s basically a negotiation between Sony and the regional player and because this is not our engine we cannot really comment until Sony comments further on this matter.

It will be different with our engines because if had discussions with future customers, or potential customers, we'll be able to provide a lot more color, because it's our engine and we can discuss it. But because last year we still were dealing with Sony's product, it's not our place to discuss the details.

Q: Henry James

Also last year you signed a royalty agreement with the Taiwanese ODM. Could you tell us what the term of that is and what the outlook for a near term revenue from that might be?

A: Alex Tokman

That was a confirmation for everyone to see that we have multiple anticipated revenue sources. This was one of the examples, where basically a company had purchased somebody else's technology but needed the license from us to sell products in different regions. We obviously, we're not going to single out that specific customer, but what we can tell you it basically supports our business model and thesis that our revenue will come from diverse sources ranging from royalty only, examples such as this one, to selling components and collection of royalty such as Sony and Sharp, or selling engines such as what we're going to start doing this year.

Q: Henry James

You talked about your developments with respect to Augmented Reality. There was a Tweet back few weeks ago from Meda and someone asked about ability for laser-based scanning to be used in augmented reality, and they responded that the power requirements were too high, but they thought laser based scanning would work much better in autonomous vehicles. Do you have any response to that?

A: Alex Tokman

I can't comment on what Meda stated. All I can tell you is that world's leading technology companies who are interested in Augmented and Virtual Reality are interested in laser-based MEMS scanning technology.

Q: Henry James

Do you feel like there is room to grow? In terms of reducing the power required for laser-based scanning?

A: Alex Tokman

We already have multiple advantages over the LCOS and DLP and other display technologies today. But absolutely, the success of Augmented Reality & Virtual Reality market relies on something that is economic, easy-to-put on and doesn't put too much pressure in terms of weight and heat on your brains. So absolutely, we're working on techniques to reduce further the power consumption. But I can tell you today, that laser beam scanning technology is the lowest power consumption technology based on everything that we know today.

Q: Henry James

Okay. Thank you.

Q: Unidentified Analyst [Private Investor]

With all the different platforms that are out there trying to solve the same problem both for projection and for being able to do things like perceive the actual work space in front you. Where do you feel you stand in this solution based? In other words, are you competitive? Do you see any technology that is causing concern that maybe there is a technology that is much more efficient or better than what you stand for? Can you give me a little idea of the competitive landscape out there?

A: Alex Tokman

The differentiation varies depending on the application. So we're focusing on four primary applications:

You have the pico projection or what we call it now interactive pico projection.

There is the obvious Augmented Reality

Then there is the 3D sensing for autonomous vehicles and robotics

and finally heads up display.

If you look at each one, you need different attributes to be successful:

Pico projection or interactive pico projection: we are excited about this for simple reasons. Not only have we proven that we are the lowest power consumption technology that can produce high-definition images. We can also combine that feature with 3D sensing to provide users visibility to interact with these images. Not a lot of companies can do this, for most companies you need to have a display technology and then 3D sensing is added separately inside the product to create this feature. We will do this in one tiny integrated system, so that’s number one.

Augmented Reality: What is so important for Augmented Reality and why most of the systems to-date have failed and not succeeded? Because no-one have been able to balance the small form factor with the large field-of-view to create high-definition images that are produced with low power consumption. No one has done this and if you've seen what Google has attempted, a valiant effort at creating something focusing on our ergonomics, but the use case did not work out, because just the image wasn’t good enough, and there are varieties of limitations.

So what we have for Augmented and Virtual reality? What we have, we believe produces the high definition images with one of the lowest power consumption, and it could be created in small enough form factor to improve the ergonomics of such device.

Q: Unidentified Analyst

Is latency still an issue with that whole technology, do you still have an advantage?

A: Alex Tokman

Absolutely. Latency and lag are the two characteristics essential to be addressed for full Augmented Reality, Virtual Reality and the autonomous vehicles.

In case for augmented/ virtual reality, the minimum lag and persistence ensures that you will not develop headaches while using this technology for extended periods of time. For autonomous vehicles and robotics, you need low lag and persistence so you can detect a set of scenery or scenery around the object and quickly make the right decisions when everything is moving around to you, so absolutely.

In case of 3D sensing, we have advantages there too. Our biggest advantage there, in addition to lag and persistence, is the fact that we can create 3D sensing system and by changing lasers and laser wave length, we can extract different things out of the environment that no one else can. And this gives us power and creates flexibility to basically optimize systems for different types of applications.

So each one has its own merits and we believe we have differentiation in each one of these segments and that’s one of the reasons we have these in development contracts and that's one of the reasons we believe we're going to be successful with new engines, particularly the interactive display engine that we are very high on.

Q: Unidentified Analyst

Yeah, these products can potentially be in such high volume. In your long-term planning looking three years out, do you see possibilities that if some of these projects take off that you could handle in volumes north of 100 million per year. I mean, is that realistic in your projections of capabilities?

A: Alex Tokman

We believe there is nothing on the supply side that could limit us on volume any longer. Right now we can scale all MicroVision related components pretty readily. We have a high-volume manufacturing partner who produces tens of millions of products for many Fortune Global 100 companies, so we have no issue there. And then basically it's all dependent on the business case. If a customer comes-in with a volume, I think it's a good problem to solve and we should be able to solve.

Q: Unidentified Analyst

So in other words, going forward your mix could be a combination of both in-house manufacturing, as well as, just letting licensing to another partner producing products using your technology.

A: Alex Tokman

That's correct, we believe as we move forward with our mix and that is why it's difficult for us to predict the specifics. Because we expect that our revenue will consists primarily from sale of new engines and also sale of components and licenses into high volume products.

Q: Unidentified Analyst

Now turning to two other issues… Number one, any issues at all with the green lasers now and where is your pricing compared to the reds and the blues?

A: Alex Tokman

The green laser is just completely not an issue any longer. Three lasers today cost less than 5% of what green laser cost us five years ago.

Q: Unidentified Analyst

Pertaining to HUD, it appears that STMicro could be a nice catalyst to get this technology to moving forward. Do you see STMicro as being a strong competitor in that field of HUD with the other competitors out there?

A: Alex Tokman

Well STMicro is actually our partner, yes. Since we announced the strategic relationships with them, obviously they are manufacturing our MEMS, we said this earlier. We believe, we have a very productive relationship with STMicro to pursue these markets together, because both ST and MicroVision will benefit by combining their respective strengths. In this case it's a high-volume manufacturing of semiconductor and fabrication capabilities. And we bring the systems knowledge and applications knowledge. So basically, that's why we created this partnership, so we can pursue these opportunities together and not compete against each other.

Q: Unidentified Analyst

And STMicro would be the lead in those negotiations or those technology talks. Would that be correct?

A: Alex Tokman

No, we actually double-team on this. It depends. If certain customers that they're closer to with they introduce us. If certain customers that we are closer with, we bring them as a support mechanism, so it depends on the customer.

Q: Unidentified Analyst

Awesome. Thanks for all your efforts it's been a long road, but it appears as though this technology is finally ready for the market and the market is ready for it. So thanks for all your efforts.

Q: Henry James [State of Michigan]

I just need a little bit of a follow up with respect to Augmented Reality. I believe you mentioned that, what you were doing was scanning directly into the eye and I was wondering are there advantages to say scanning directly into the eye as opposed to sort of a near eye display in terms of field-of-view.

A: Alex Tokman

Henry everything that we know today, we believe that because we're using MEMS based laser scanning technology that requires few optical intermediate parts, we can create a larger field-of-view by simply moving our mirror at certain angles without requiring to have special optics to than move the signal into the person’s eye.

Just by the definition, our biggest inherent advantage is the fact that we don’t need extensive optical solution to create this system. That’s what one of the limitation of LCOS and the LED systems is the fact that when you use LED, you need to propagate the light then you need to collect this light with optics to point into the tiny area. With that, the laser beam that is scanned at a very high frequency -- low duty cycle allows you to concentrate energy into the small area safely and reliably.

Q: Henry James

Thank you.

Closing Remarks:

We have no further questions at this time. And I will now turn the call over to Alex Tokman for closing remarks.

Alex Tokman

Look, what can I say, 2016 was a pivotal year for us and we are optimistic we’re going to have even better 2017. Our goal for 2017 is to again achieve significant revenue growth. We have delivered on this goal through persistent execution of our business plan in 2015 and 2016 and we anticipate doing exactly the same thing in 2017.

For the near-term, we plan to introduce a diverse line-up of LBS engines in 2017 and 2018 to empower products were interaction with the information is just as important as giving it. And we anticipate revenue between $30 million to $60 million in the 12 to 18 months following the mass production shipments of the first engine.

For the longer term, we’re advancing our laser beam scanning technology to meet the requirements of emerging application such as autonomous vehicles and Virtual and Augmented Reality. We have development underway, with two leading technology companies for these applications and we are optimistic that our deliverables would lead to additional opportunities.

At this point on behalf of all my MicroVision team mates I want to thank you for your continued support and thank you for joining us this morning.

ANALYSIS

MicroVision has had a long standing relationship with STM going back years and STM manufactures MEMS and ASICS for MicroVision. STM with its acquisition of bTendo has had LBS on its product roadmap for quite some time. That said, it’s taken a lot longer than expected for all the pieces to fall in place for wide scale mass adoption of LBS projection, yet finally all the obstacles have been set aside (low cost green lasers, laser safety standards and mass production capability to name just a few). Early adopter products have finally entered the market to test the waters and gain experience. Next is crossing the chasm and achieving wide scale mass adoption. The pins are now lined up in the bowling alley and its time to throw the ball and start knocking them down.

Aside from the “Apple Loves Us” comment purported to be said by Alex Tokeman at an ASM, Apple R&D and MicroVision have had a history of collaboration (or at a minimum joint interests) covering LBS patent areas. A search on Peter’s excellent website searching for apple and patents illustrates this nicely. With Apple’s secrecy, indirect inference it about as good as it gets.

Another key aspect from the standpoint of Apple (and other OEMs) is risk. Risk is reality in large Fortune 100 organizations. Warranty, product liability, supply chain executions are just a few of the biggies. Product adoption risk is also present, but it’s the other risks citing that can really sink the ship (and even worse from management’s perspective, end some careers). Understanding this decision making behavior and contrasting it with a purely ‘product’ based perspective is another key to understanding why its taken MicroVision so long to reach the mass market. Apple is not going to use MicroVision components and you’re not going to see MicroVision listed in their supply chain. Way too much risk! Apple will however, use Foxconn and STMicro.

So after years (actually a decade or more), Apple is finally ready to adopt LBS in its products. They look to their supply chain and the logical choice is STMicro, Sony, Foxconn/Sharp. With all the R&D over the years, Apple knows how to reduce the product adoption risk, but its the safety standards, supply chain and manufacturing risks that need to be mitigated. Safety standards (government and regulatory) apparently has been managed with the new LBS standards that reflect objective reality vs. DLP FUD. STMicro and others with a long term stake in getting this corrected were likely key influencers. That leaves manufacturing and supply chain. Forecast product demand and lock down the supply of all key components years going forward (and to the exclusion of competitors) is an Apple mantra and something Tim Cook is quite adept at.

This leaves manufacturing (a competency Apple actually outsources to world class partners like STM and Foxconn). Sony with its camera and image sensor business with Apple was certainly in the running, but at the end of the day, STM had the edge on LBS MEMS and Display Engine manufacturing competency which put tiny MicroVision in a bit of a bind. In 2015, Sony invested in an 8 year product and licensing agreement with $8 million in upfront money to MicroVision. Yet, the big dog calling the shots is Apple and they are going with STM. Apple with its deep expertise in LBS patents understands what MicroVision patents offer as does STM. Until recently, an agreement with MVIS was not needed (you need one when commercial products will be entering the market shortly) which is where we are now. So, MicroVision signed the agreement with STM on Nov 10th, 2016.

A week earlier on Nov 2nd, MicroVision announced its growth strategy using its own 3 new engines with the $30-$60 million in revenue from them. First reaction to this is “Isn’t this what Sony was supposed to be doing?” Nov 10th, 2016 clarified matters and then some with the joint STM/MVIS press release that mentioned not just selling and marketing, but a ‘Joint LBS Product Road Map’. Again, wasn’t this what Sony was supposed to be doing with MVIS? Stake in the heart for Sony, but they already knew that, which is why MicroVision CEO Tokman guided lower to nil product revenue in Q1 2017 on the Q3 2016 call. This also explains the painstakingly slow product roll out of the Celluon products dependent on Sony engines. These types of deals take time to sort out, so there was likely trouble in paradise between MVIS and Sony for a while.

Bottom line, the path for MVIS was forced by others (Apple and other OEM/ODMs) and STM agreement was solidified prior to commercial product launches. Then, icing on the cake for MVIS is the press release on Nov 21st with the Taiwan ODM. There are two key points on this. Its a patent/royalty agreement and its specifically related to the agreement with STM.

So, next up for MicroVision is to move forward working with other OEM/ODMs (what Sony was supposed to be doing). That required funding and late December funding is obtained and more was required than one might initially expect, because with Sony backing away, MVIS needed more funding for the new engine development and launch.

Then as a good partner would do, STM fully embraces MicroVision in their CES-2017 booth jointly showcasing products. Which by the way is a far cry from your partner (Sony) not letting you even mention their name for a year or more).

This brings us to Benedetto Vigna and his background and proven track record of success. He knows how to execute. STM is front and center the key to adoption of LBS in the mass market, and more than anything a bet on MVIS is now a bet on Benedetto Vigna at STM. MVIS and CEO Tokman are hitched on for the ride with Sony being ‘left out of the picture.’

Finally, we have some institutions and AWM Investment Company Inc as shareholders. With its choppy 20 year track record, its no wonder why many institutions have stayed away from MVIS. There are lots of companies and techs to invest in. Why choose MVIS with the lack of visibility into its operations. Investment decisions need to be justified, especially at large institutions. Until there’s more clarity, they will wait and then jump in at the above $5 level when making the decision to buy MVIS is safer and yet still has reasonable upside. You need a rare bird like AWM Investment Company (hedge fund with its early adopter approach and growth management) that’s willing to take the sizable early risk.